Is it Finally Time to Give Gold Another Look?

By Giles Coghlan, Chief Market Analyst, HYCM

It has been a difficult year for investors across the board, with all but the dollar and energy bulls seriously struggling in this higher rate and inflationary environment. Something investors often forget is the importance of defensive trades, and the fact that certain assets are there to balance your portfolio when everything else in the macro and geopolitical picture is otherwise looking grim.

It’s easy to overlook the value of portfolio protection during bull markets, especially when the price seems to go up every day and buying every dip becomes the top priority. But at HYCM, we’re always trying to educate our investors about the value of balance in a portfolio, as well as covering the various phases of subsequent bull and bear markets.

This is because when the tide turns, if your mentality doesn’t shift with it, and if you haven’t invested in anything other than risk, it can be catastrophic to your account balance.

Gold Protected Investors Throughout 2022

Year-to-date, the two big success stories of 2020 and 2021, US equities and crypto, are down 17% (S&P500) and 69% (Total crypto market cap), respectively. Meanwhile, gold is down less than 5%. This is despite higher rates, which tend to weigh on the price of gold since it bears no yield and so has an opportunity cost associated with holding it.

But also, the harmonisation of tighter monetary policy across almost all global central banks, which again is a headwind to gold as it’s usually looser policy and the fear of currency debasement that turns investors bullish on the yellow metal.

Furthermore, gold’s reputation as a safe haven has taken a hit in recent years. Back in 2019, what can only be described as a crypto PR campaign, had the narrative of bitcoin as the new digital gold spreading among both retail and institutional investors.

Then, when gold failed to hold the new highs it set after the worst of the March 2020 crash, and amidst governments running the largest deficits to fight the pandemic since WWII, many started believing that perhaps gold was an outdated safe haven. That’s certainly not proven to be the case, with it having performed better than most assets when it comes to preserving value throughout a very difficult year.

Gold Is Up YTD Against Other Majors

In fact, it’s US dollar strength (up 12% year-to-date) that’s really prevented gold from having been both defensive and profitable throughout 2022. Priced in euros, gold is up almost 5.5% year-to-date. Meanwhile, priced in pounds sterling gold is up 11.5%, and priced in Japanese yen it’s up almost 17%, which is easy to overlook since it’s the USD prices that are constantly quoted.

If the US dollar is set to continue cooling off for a while, this could give gold a further boost, and if, as many analysts are suggesting, the Fed will eventually be forced not to just pivot on rates, but also return to a much looser monetary policy, this could also benefit gold, especially if this occurs during a recession.

The FTX Collapse

However, the most unlikely boost for gold could come from the recent collapse of the FTX exchange in the world of crypto. If you haven’t been following the story, crypto’s second largest global exchange recently filed for bankruptcy. As the details of the collapse continue to emerge, it appears as though the exchange was rife with corruption, front-running, and self-dealing. The collapse follows the recent Terra/Luna stablecoin failure earlier this year, and takes the number one place as the biggest and most costly failure in crypto’s history.

Why is this good for gold? FTX was probably the highest profile crypto exchange in the industry, and, particularly in the US, was responsible for pushing crypto very much into the mainstream throughout the bull market of 2021. This collapse, and the details of how it actually occurred, has caused sentiment around crypto to turn as negative as it has ever been (even in the wake of the MTGox collapse of 2014).

This one event, beyond dispelling the notion that crypto is ready to be a global safe haven asset, has gone a long way to undermining all the other narratives that have been established around the asset class over the past decade or so.

FTX had more than a million users, many of whom have now lost everything. It will take a long time, even among the industry’s best and most reputable names, to build that trust, which leaves gold to reclaim that place in the minds of traders as the only true, tried and tested safe haven throughout the ages.

Gold CFD is available for trading at HYCM broker.

Trade with HYCM

About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd, HYCM Ltd, and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.

High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

*Any opinions made in this material are personal to the author and do not reflect the opinion of HYCM. This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise.